How to financially prepare for parenthood

Billions of words have been written and spoken about parenthood, but there are a few that aren’t often said - being a parent can be really expensive!

Stephanie Pow knows more than most when it comes to the financial aspect of parenting. She’s a mother of two and founder of Crayon, a platform that helps Kiwi parents make confident financial decisions so they can plan a bright future for their family. We spoke to Steph about how parents-to-be can be more prepared for what lies ahead.

“We don’t like to think of our children in financial terms but the reality is that parenthood ushers in a new financial chapter," says Steph.

"Many of us face a loss of income while on parental leave and more expenses,” Stephanie says. 

Managing all of this on top of pregnancy, raising a family and maintaining a career can be challenging - but armed with a little knowledge and few smart financial tips it’s doable. 

Knowing the real cost of parenthood - year one

Research from BNZ done in 2018 estimated that parents need around $15,834 a year (that's $304 a week) to raise a child on a medium spend budget in New Zealand. 

We all know the prices are on the rise with inflation, so that number is likely considerably higher in 2022. 

That number includes:

• Baby gear: The baby gear industry has a way of making you feel like buying more stuff makes you a better parent (it doesn’t). Stuff like strollers, cots, car seats, bassinets, clothing, baby carriers and high chairs can cost anywhere from $1,000 to $10,000 total, depending on your preferences and where you buy from. 
• Nappies, baby wipes and creams: These cost an average $1,750/year.
• Food and nutrition: Things like breastfeeding gear, bibs, solid food and utensils can set you back $1,470 a year on average.
• Night time supplies: Cot, mattresses, mattress protectors, sheets, baby monitors and portable cots are expensive, costing an average of $1,285 a year.
• Getting mobile: Annual spend on car seats, strollers, and carry packs is around $650.
• Ongoing costs: Childcare is the biggest ongoing cost of having kids. This can vary depending on whether you go for daycare or at-home care and whether you’re eligible for subsidies, but the BNZ figures estimated this could be $8,750 a year back in 2018.

While the above figures are a good average estimate, it’s ultimately up to you how much you spend, and Steph points out that not every family will have the same costs.

“There can be significant variation in child-related costs from family to family - as with parenting decisions in general, your choices will depend on your priorities, circumstances and habits,” she says.

The hidden costs of parenting

Many of the costs of parenting are hidden, and in the long run these hidden costs can be the most financially significant.

For one, most parents experience a drop in income. If the primary carer takes their full 52 weeks of parental leave and their partner takes two weeks of unpaid leave they can expect a drop in take-home pay of around $25,000 after tax (assuming they’re both earning the NZ median wage of around $1,000 per week). 

Retirement savings can also be negatively affected. By default, KiwiSaver contributions are not deducted from government parental leave payments unless you opt in and your employee/employer contributions will typically stop.

Often this will mean your KiwiSaver contributions will be less than $1,046 for the financial year which will mean you won’t be maximising the government tax credit of $521.43. This can have a huge affect on the KiwiSaver balances of primary carers later in life.

“If our primary carer earning the median wage was contributing 3% to their KiwiSaver but stops contributions during their year of parental leave, then their retirement account is $3,300 worse off. Assuming they are in a default balanced fund, that could be worth more than $9,000 at retirement 30 years later.”

Think that sounds bad? Recent research from NZIER for Kiwi Wealth estimated that the cost of taking time out of the workforce on women's KiwiSaver balances could add up to as much as $318,000 by retirement age.

Things you can do to prepare financially for parenthood

Raising a child can be expensive and even impact your long term financial prospects, but there are several things you can do to prepare and reduce that impact:

• Talk to your employers about parental leave and what they offer - the most generous policies can see you receive up to six months of full pay while on leave. If you’re not yet pregnant and thinking of changing jobs, factor in prospective employers' parental leave policies when searching. It’s also important to note that to be eligible for six months parental leave you have to have been in your current job for at least six months (and one year for one year of parental leave).
• Look into Government assistance: In addition to paid parental leave, There is Government support available for families, including Working for Families, Best Start, the ECE Subsidy, Sole Parent Support, Accommodation Supplement and the Childcare Subsidy. Plunket has a list of many of these that you can check out.
• Start saving up a rainy day fund: Aim for around 3-6 months of living costs. Try automated saving on payday so you don’t even see the money when it arrives in your bank account.
• Create a budget: and estimate the total cost of parenthood so that you can better plan for it. Factor in things like the increased cost of electricity if you'll be spending more time at home (and using it at all hours of the day and night!) Will you be living off one income? Make sure you budget for this and do a trial run to see if it's possible for a month or two to get a feel for how this change might impact you.
• Keep those KiwiSaver contributions going If you can manage it, keep up your KiwiSaver contributions while you’re on parental leave to keep growing your retirement savings.
• Consider insurance: taking out insurance can be a good way to provide for your family should something happen to you. Definitely do your research and speak to a financial adviser about income protection insurance, health insurance and life insurance to find a policy or combination of policies that suit your situation. 
• Save on baby gear: It’s important to understand what you really need and what you don’t. Babies grow fast - within a year you probably won’t be using half the stuff you bought for them when they were born. Need a hand figuring out what you need? Check out the Crayon Baby Gear List.

It’s also handy to know that there’s a healthy second-hand market for baby stuff and other parents are often very generous with hand-me-downs and lending. Jumping on TradeMe or getting in touch with your parent friends could save you thousands. 

Finally, it’s a great idea to start thinking of your child’s financial future as soon as you’re ready. That might mean building up investments for them to provide them with opportunities in the future or estate planning and taking out insurance to protect them in case the unexpected happens. 

Check out this video on growing financially resilient kids for some practical examples. 

Managing your finances may be tough for a while, but it’s not forever and ultimately it’s all worth it (hopefully!)

“It’s important to acknowledge that this is a financially challenging time of your life - it is hard for many new parents," says Steph.

"It doesn’t change the situation but it can be helpful to remind yourself that this isn’t a permanent financial challenge.” 

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